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Supreme Court Ruling Means States Can Tax Amazon Marketplace

(Bloomberg) -- A U.S. Supreme Court ruling Thursday will allow states and local governments to pursue sales taxes on more online transactions. The big question for Amazon.com Inc. is how states will collect it.

The world’s largest online retailer already takes in sales taxes in all states that charge them on transactions involving its own inventory. That hasn’t blunted revenue growth at all. But most of Amazon’s purchases are from millions of independent merchants who post inventory on the web store, and many of those sales currently aren’t taxed. Third-party merchants account for about half of Amazon’s total online sales.

Broader taxing power will let state and local governments collect an extra $8 billion to $23 billion a year, according to various estimates. All but five states impose sales taxes. About 16 states already have laws that will let them require tax collection by internet retailers in the coming months, and more could follow quickly.

The Supreme Court review of the Wayfair Inc. case ignited debate and posturing last year. The decision Thursday overturned a decades-old ruling that prevented the collection of duties on many of those sales -- merchants selling goods on Amazon argued it would be onerous for them to adhere to some 17,000 tax jurisdictions in the country --including cities, counties and special taxing districts. Amazon has long lobbied for a federal law that streamlines online sales tax collection nationwide, but none has ever gained traction.

“Amazon’s third-party business should be minimally affected in the long term from states imposing taxes on online sales, as the impact is equal across the e-commerce ecosystem. ” said Jitendra Waral, an analyst at Bloomberg Intelligence. “This makes online sales more a function of loyalty and preferences than pricing, which highly favors Amazon.”

Washington, Pennsylvania and Minnesota enacted laws last year requiring Amazon and other online platforms to collect taxes on marketplace sales. In the wake of the Supreme Court ruling, more states are likely to follow suit, meaning more online sales will be subject to the tax. Such a change is unlikely to dislodge many shoppers from Amazon, where the average transaction is less than $40, so the taxes are minimal, Waral said. Online sellers of expensive items like furniture and jewelry could see a diminished advantage over brick-and-mortar rivals that collect sales tax.

For Amazon, the loyalty of its Amazon Prime subscribers, who pay monthly or yearly fees for shipping discounts, could soften the blow of tax collection, said Charlie O’Shea, a retail analyst at Moody’s.

“As Amazon has continued to thrive despite losing the obvious pricing benefit it used to have from not collecting sales taxes in its proprietary business, it remains to be seen if this new ruling will have any real impact on its third-party sales, or if the convenience for shoppers and growing benefits to Prime members will mitigate the pricing shift,” he said.

Online merchants will have to carefully monitor where their orders are coming from because states such as Colorado and Louisiana now require retailers with online sales greater than $100,000 in their state to report the business to state tax authorities, said Scott Peterson, vice president of tax policy at Avalara Inc., which sells accounting software to online merchants.

“Everyone should take a moment and take a breath,” he said. “It’s going to be a while before there’s any real direction.”